TaxTMI 
TaxTMI 
2023 (11) TMI 442
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....ovisions and NOT 'cash credit' and hence Sec. 68 had no application. 4. The Ld. CIT(A) failed to appreciate that the amount of Rs. 11,73,19,373 was adjusted in the subsequent years by way of share purchase agreement." 3. Serco India Private Limited was a subsidiary of Serco Group PLC, UK, incorporated in India on 27-02-2006. The company was established as a captive service center with an objective to provide IT and IT enabled services to Serco Group. The assessee company filed its return of income for Assessment Year 2013-14 on 29.11.2013 declaring loss of Rs. 5,68,34,642/- which was processed u/s 143(1) of the Income Tax Act, 1961. 4. The assessment was completed u/s 143(3) of the Act vide order dated 15.12.2016 wherein addition u/s 68 of Rs. 11,73,19,373/- was made on account of difference between the opening balance and closing balance of sundry creditors, and ad-hoc disallowance of Rs. 4,43,77,875/- was also made on account of 20% of net 'other expenses' of Rs. 22,18,89,377/- debited in profit & loss account. The assessee company preferred an appeal before Ld. CIT(A), who has decided the appeal vide order dated 21.01.2019 wherein the Ld. CIT(A) has confirmed the addition u/....
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.... Indore and has not provided IT or IT enabled services to Serco Group. As the assessee company could not obtained more contracts for Maintenance and Operations of road transportation or metro rail despite incurring huge expenditure on manpower and other expenses and incurring losses. 10. It is relevant to note that the Board of Directors of the company in its resolution dated 27th August 2014 has decided to close down the operations of the company in the foreseeable future (as mentioned in Note No. 1(h) of Notes forming part of financial statements for the year ended 31st March 2014) (PB Volume-2 Page 974). Thereafter, all the shares of the assessee company were sold to M/s Travel Time Car Rental Private Limited and M/s Mahalaxmi Automotives Private Limited by Serco Group vide Share Purchase Agreement executed on 1103-2015 (PB Volume-1 Pages 661 to 704). Thus, the management & control of the assessee company was taken over by M/s Travel Time Car Rental Private Limited and M/s Mahalaxmi Automotives Private Limited from Serco Group in March 2015. 11. The Assessing Officer made a reference to TPO to determine the Arm's Length Price (ALP) in respect of International Transactions and ....
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....sary documents so that the assessee company can represent the case properly before the Ld. CIT(Appeals) but Serco Group UK has not provided the relevant documents, inter-alia, stating in the mail dated 20-01-2017 that "Your requests in respect to the above have come to the attention of the internal legal team and, as you can appreciate, we are sensitive to the disclosure of data to third parties." (PB Volume-1 Page 9). Thus, despite repeated mails, Serco Group UK has not provided the relevant documents. 15. During the appellate proceedings before the Ld. CIT(Appeals), the assessee company gathered documents in the form of copy of agreements, lease deeds, some invoices and copy of bank statement of the relevant period evidencing payments against expenses and TDS certificates and furnished before the Ld. CIT(Appeals) (PB Volume-1 Pages 10 to 551) with the request to admit the same under rule 46A of the Income Tax Rules 1962 as the assessee was prevented by sufficient cause from producing these evidences before the Assessing Officer which are relevant to grounds of appeal. Ld. CIT(A) forwarded the additional evidence to the Assessing Officer who has submitted his report. The assessee....
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....8,37,00,146 Total Cost Personnel Expenses 15,07,08,871 4,85,98,973 19,93,07,844 19,93,07,844 Administrative and other expenses 11,54,81,465 7,49,61,474 3,35,22,112 22,39,65,051 22,39,65,051 Finance Cost - - 1,81,59,294 1,81,59,294 1,81,59,294 Depreciation 15,72,440 24,97,743 15,64,559 56,34,741 56,34,741 Operating Cost 26,77,62,775 44,70,66,930 Total Cost 26,77,62,775 7,74,59,217 10,18,44,938 44,70,66,930 44,70,66,930 Profit Before Tax 3,99,40,832 (17,96,697) (10,15,10,919) (6,33,66,784) (6,33,66,784) 20. The Ld. CIT(A) has noted that the assessee company is primarily engaged in management consultancy services to its group companies. The assessee has incurred expenses of Rs. 10,18,44,938/- on items not allocated to management services and since, these expenses were also covered by the agreement with the related parties for providing management services and therefore, should have been charged to related parties at a mark-up f....
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....ese include salary & wages, allowances of marketing staff allocated for the purpose, hotel cost, conference fees, marketing expenses etc. These expenses were purely incurred to generate new business and to get new projects. Hence, these expenses were incurred for the business of the assessee. 24. After examination of the details filed, not satisfied with the submissions, the Ld. CIT(A) made disallowance of expenses of Rs. 10,18,44,938/- as under: 1. Personnel expenses Rs. 4,85,98,937 2. Administrative and other expenses Rs. 3,35,22,112 3. Finance cost Rs. 1,81,59,294 4. Depreciation Rs. 15,64,559 Total Rs. 10,18,44,938 25. The Ld. CIT(A) mainly observed that these expenses were incurred in relation to management services provided by the assessee to its AEs and there was no evidence of any such expenditure having incurred for any other activities. It was inter-alia observed that the proposal for Maintenance and Operation of BRT bus services in Indore was floated by the Government Authorities and any such proposal/bidding does not require manpower or employees as claimed by the assessee. 26. During the hearing before us, it was submitted that Ld. CIT(A) is no....
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....ar activity. Non-allocable expenses even for a management consultancy providing company are costs that cannot be directly attributed to specific projects or client engagements and therefore cannot be allocated on a project-byproject basis. These expenses are more general in nature and are incurred to support the overall operations of the company rather than any particular client work. Some examples of non-allocable expenses that a management consultancy company normally incur: (i) Administrative Salaries: Salaries of employees who handle administrative tasks such as human resources, accounting, finance, and general office management. (ii) Office Supplies: Expenses related to office supplies like stationery, printers, copiers, and other necessary equipment. (iii) Marketing and Advertising: Costs associated with marketing campaigns, website maintenance, branding, and promotional activities that benefit the overall company rather than specific projects. (iv) Insurance Premiums: Payments for insurance coverage to protect the company against risks, such as liability insurance, property insurance, and workers' compensation insurance. (v) IT Infrastructure: Expenses related ....
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....ge 12% 45% 43% 100% F.Y. 2012-13 (A.Y. 2013-14) Management Services Other - Non allocated Total Personnel Expenses 15,07,08,871 4,85,98,973 19,93,07,844 Percentage 76% 24% 100%, Administrative and other expenses 11,54,81,465 10,84,83,586 22,39,65,051 Percentage 52% 48% 100% Depreciation 15,72,440 40,62,301 56,34,741 Finance Expenses - 1,81,59,291 1,81,59,291 Total 26,77,62,776 17,93,04,151 44,70,66,927 Percentage 60% 40% 100% 33. From the above, it can be found that there have been nonoperating non-allocable expenses in the range of 40% to 49% in these years and the position of the current year is also consistent with that of earlier years. 34. Therefore, even on merits, we hold that the Ld. CIT(A) is not justified in allowing only 'operating expenses' allocable to the segment of rendering management consultancy services and direct expenses on sub-letting and disallowing all the nonoperating and non-allocable expenses incurred by the assessee company. 35. Further, it is essential to note that during the year under consideration the assessee company has also started expansion of its business activities towards maintenance and opera....
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.... as claimed by the assessee for which the assessee would have paid Rs. 4,85,98,973/- and that there was no evidence of any such expenditure having been incurred on any other activity. 39. The marginal increase in salary & wages from earlier year that as mentioned above, in earlier years also there were nonoperating and non- allocable personnel expenses of about 43% in F.Y. 2010-11 and about 27% in F.Y. 2011-12 respectively whereas in the year under consideration, non-allocable personnel expenses were 24% only. The observation of Ld. CIT(A) that for getting contract of BRT bus services does not require manpower or employees is not tenable. The assessee has to prepare technical bid and financial bid to file tender for obtaining contract of BRT bus services in Indore which were required to be competitive with other bidders/parties and therefore, the assessee has to employ special manpower and lot of time and effort was involved in preparing the bids. These activities also required availing of consultancy services as well as traveling and other expenses. 40. The Indore BRTS Bus Operations and Maintenance Agreement dated 26.11.2012 that ATAL Indore City Transport Services Limited, Ind....
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....mitted that proceedings before the Ld. CIT(A), they have furnished details of other expenses along with Name, Address, and PAN of the Parties, Amount paid, TDS deducted, copies of Form No. 16A, copy of Engagement Letter, copy of Lease Deed, copy of Contracts and also copy of bank statement highlighting the payments on various dates to these parties demonstrating that all the expenses incurred on various items under the head 'Other expenses'. The assessee has also furnished copy of account of the assessee company as appearing in the books of DLF Cyber City Developers Limited and sample copy of invoices raised by M/s DLF Cyber City Developers Limited and M/s Rentworks India Private Limited. 48. From the details of expenses furnished, it is clear that certain expenses were incurred for expansion of the business other than the main segment of Management Consultancy services such as the assessee has engaged the services of KPMG to assist the assessee company in reaching out to other potential target companies in sectors namely Transportation, Healthcare and Education and paid fee for such advisory services (refer PB Volume-1 Page 12 and Pages 40 to 58). Another payment of fees for prof....
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....s. 15,72,440/- and to sub-letting segment of Rs. 24,97,743/- out of total depreciation as per books of Rs. 56,34,741/-. The balance depreciation of Rs. 15,64,559/- was on other items not allocable to any particular segment. Therefore, the Ld. CIT(A) was not justified in disallowing depreciation of Rs. 15,64,559/- on the assets used for the purpose of business. 54. However, it is pertinent to mention that the total depreciation of Rs. 56,34,741/- was as per books and which was added back in the computation of income and the assessee has claimed depreciation as per Income Tax Act of Rs. 14,97,543/- only, which is less than the amount of depreciation of Rs. 15,72,440/- charged from AEs for management consultancy services (refer PB Volume-2 Page 1094). Therefore, on this account, no disallowance was required to be made. Hence, disallowance out of depreciation of Rs. 15,64,559/- be deleted. Ground Nos. 3 to 5 Sundry Creditors: 55. These grounds are against the addition of Rs. 11,73,19,373/- made u/s 68 of the Act on account of difference in opening balance and closing balance of sundry creditors (Trade Payables). 56. In this case, the AO noted that the assessee company has shown cl....
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....alary payable to expats was recoverable by the assessee with a markup factor of 15%. There is, therefore, no net liability in the hands of the assessee for payment of salary payable to expats to its AE. Moreover, these creditors on account of company payables have been shown to be accumulating from F.Y. 2010-11 onwards and continued as such in the accounts of the assessee upto the year 2014 and were thereafter claimed to have been settled through and in accordance with the terms of the share purchase agreement dated 11.03.2015. The ld. CIT(A) held that it is highly improbable that no payment was adjusted by the AE against this liability when the assessee raised its bills on cost plus basis. 60. Regarding the credit balance on account of provisions created amounting to Rs. 3,22,02,348/-, Ld. CIT(A) stated that no evidence was submitted to prove the genuineness of these creditors and on what basis these provisions were created. The ld. CIT(A) held that mere claim of payment of these creditors through bank does not prove that the creditors were in fact genuine. The genuineness of the sundry creditors claimed by the assessee was therefore not established. It was also mentioned that th....
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.... not based on proper appreciation of facts of the case. It may be noted that the assessee company has rendered Management Consultancy Services to other Associate Enterprises such as Serco Group Pty Limited Australia and Serco Limited Dubai. The assessee company had not made any payment to Serco UK for reimbursement of part salary paid in foreign currency by Serco UK on behalf of the assessee and therefore, the amount payable to Serco UK has increased. Therefore, there was trade payables of Rs. 17,51,45,528/- to Serco UK as on 31.03.2013. This trade payables to Serco UK have increased in Indian Rupees to Rs. 19,21,00,000/- mainly due to the increase in the exchange rate of UK Pound. 64. It is also submitted that in para 4.12 of 'Share Purchase Agreement' (PB Volume-1 Pages 661 to 704) it is stated that "As per disclosure made in audited financial accounts of the Company for the financial year 2013-14, an amount of INR 19,21,00,000 (Indian rupees nineteen crores and twenty one lakhs) is due to Serco Limited, UK, which is a group company The Company shall and the Sellers shall procure that the Company shall provide the Purchasers with proof of remittance indicating the discharge of l....